Non-financial reporting p2


Non-financial reporting


Non-financial information, in the form of additional information provided alongside the financial information in the annual report, has become more important in recent years.


While financial information remains important, stakeholders are interested in other aspects of an entity’s performance.


For example:


  • how the business is managed


  • its future prospects


  • the entity’s policy on the environment


  • its attitude towards social responsibility.


Although these activities do have an impact upon financial position and performance, some users of financial statements may have a particular interest in these activities. For example, potential shareholders may be attracted to invest in a particular entity (or not), based upon their environmental or social policies, in addition to their financial performance. Regulators or consumer pressure groups may also have a particular interest in such policies and disclosures to manage their activities or monitor the effectiveness of their activities.


Additional reports and disclosures go some way towards providing transparency for evaluation of entity financial performance, position and strategy. Transparency fosters confidence in the information which is made available to investors and other stakeholders who may be interested in both financial and non-financial information.


2 Management commentary



Management commentary


Purpose of the Management Commentary


The IFRS Practice Statement (PS) Management Commentary provides a framework for the preparation and presentation of management commentary on a set of financial statements.


Management commentary provides users with more context through which to interpret the financial position, financial performance and cash flows of an entity.


It is not mandatory for entities to produce a management commentary.


Framework for presentation of management commentary


The purpose of a management commentary is:


  • to provide management’s assessment of the entity’s performance, position and progress


  • to supplement information presented in the financial statements, and


  • to explain the factors that might impact performance and position in the future.


This means that the management commentary should include information which is forward-looking.


Elements of management commentary


Management commentary should include information that is essential to an understanding of:


  • the nature of the business


  • management’s objectives and strategies


  • the entity’s resources, risks and relationships


  • the key performance measures that management use to evaluate the entity’s performance.




3 Environmental reporting



Environmental reporting


Environmental reporting is the disclosure of information in the published annual report or elsewhere, of the effect that the operations of the business have on the natural environment.


Environmental reporting in practice


There are two main vehicles that companies use to publish information about the ways in which they interact with the natural environment:


  • The published annual report (which includes the financial statements)


  • A separate environment report (either as a paper document or simply posted on the company website).


IAS 1 points out that any statement or report presented outside financial statements is outside the scope of IFRS Standards. This means there are no mandatory requirements governing the production or content of separate environmental reports.


The content of environment reports


The content of an environment report may cover the following areas.


  • Environmental issues pertinent to the entity and industry


–   The entity’s policy towards the environment and any improvements made since first adopting the policy.


– Whether the entity has a formal system for managing environmental risks.


– The identity of the director(s) responsible for environmental issues.


– The entity’s perception of the risks to the environment from its operations.


– The extent to which the entity would be capable of responding to a major environmental disaster and an estimate of the full economic consequences of such a future major disaster.


– The effects of, and the entity’s response to, any government legislation on environmental matters.


– Details of any significant infringement of environmental legislation or regulations.


– Material environmental legal issues in which the entity is involved.


– Details of any significant initiatives taken, if possible linked to amounts in financial statements.


– Details of key indicators (if any) used by the entity to measure environmental performance. Actual performance should be compared with targets and with performance in prior periods.


  • Financial information


– The entity’s accounting policies relating to environmental costs, provisions and contingencies.


– The amount charged to profit or loss during the accounting period in respect of expenditure to prevent or rectify damage to the environment caused by the entity’s operations. This could be analysed between expenditure that the entity was legally obliged to incur and other expenditure.


– The amount charged to profit or loss during the accounting period in respect of expenditure to protect employees and society in general from the consequences of damage to the environment caused by the entity’s operations. Again, this could be analysed between compulsory and voluntary expenditure.


– Details (including amounts) of any provisions or contingent liabilities relating to environmental matters.


– The amount of environmental expenditure capitalised during the year.


– Details of fines, penalties and compensation paid during the accounting period in respect of non-compliance with environmental regulations.


Social reporting


Corporate social reporting is the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large.


Social responsibility


A business interacts with society in several different ways as follows.


  • It employs human resources in the form of management and other employees.


  • Its activities affect society as a whole, for example, it may:


–   be the reason for a particular community’s existence


– produce goods that are helpful or harmful to particular members of society


–   damage the environment in ways that harm society as a whole


– undertake charitable works in the community or promote particular values.


If a business interacts with society in a responsible manner, the needs of other stakeholders should be taken into account and performance may encompass:


  • providing fair remuneration and an acceptable working environment


  • paying suppliers promptly


  • minimising the damage to the environment caused by the entity’s activities


  • contributing to the community by providing employment or by other means.


Reasons for social reporting


There are a number of reasons why entities publish social reports:


  • They may have deliberately built their reputation on social responsibility (e.g. Body Shop) in order to attract a particular customer base.


  • They may perceive themselves as being under particular pressure to prove that their activities do not exploit society as a whole or certain sections of it (e.g. Shell International and large utility companies).


  • They may be genuinely convinced that it is in their long-term interests to balance the needs of the various stakeholder groups.


  • They may fear that the government will eventually require them to publish socially oriented information if they do not do so voluntarily.




Sustainability is the process of conducting business in such a way that it enables an entity to meet its present needs without compromising the ability of future generations to meet their needs.




A sustainability report is a report published by a company or organisation about the economic, environmental and social impacts caused by its everyday activities.


More and more business entities are reporting their approach to sustainability in addition to the financial information reported in the annual report. There are increased public expectations for business entities and industries to take responsibility for the impact their activities have on the environment and society.


Reporting sustainability


Reports include highlights of non-financial performance such as environmental, social and economic reports during the accounting period. The report may be included in the annual report or published as a stand alone document, possibly on the entity’s website. The increase in popularity of such reports highlights the growing trend that business entities are taking sustainability seriously and are attempting to be open about the impact of their activities.


Framework for sustainability reporting


There is no framework for sustainability reporting within IFRS Standards.


This lack of regulation leads to several problems:


  • Because disclosure is largely voluntary, not all businesses disclose information. Those that do tend to do so either because they are under particular pressure to prove their ‘green’ credentials (for example, large public utility companies whose operations directly affect the environment) or because they have deliberately built their reputation on environmental friendliness or social responsibility.


  • The information disclosed may not be complete or reliable. Many businesses see environmental reporting largely as a public relations exercise and therefore only provide information that shows them in a positive light.


  • The information may not be disclosed consistently from year to year.


  • Some businesses, particularly small and medium sized entities, may believe that the costs of preparing and circulating additional information outweigh the benefits of doing so.


However, the benefits of sustainability reporting are widely known. In particular, shareholders, banks and the public are more likely to see the rewards of long-term sustainable behaviour rather than short-term profit seeking.


6 Integrated reporting



Integrated reporting and the IIRC


What is the IIRC?

The International Integrated Reporting Council (IIRC) was created to respond to the need for a concise, clear, comprehensive and comparable integrated reporting framework.


The IIRC define an integrated report (IR) as ‘a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.’


The IIRC believe that integrated reporting will contribute towards a more stable economy and a more sustainable world.


What is the role of the IIRC?


At present a range of standard-setters and regulatory bodies are responsible for individual elements of reporting. No single body has the oversight or authority to bring together these different elements that are essential to the presentation of an integrated picture of an organisation and the impact of environmental and social factors on its performance. In addition, globalisation means that an accounting and reporting framework needs to be developed on an international basis. At present, there is a risk that, as individual regulators respond to the risks faced, multiple standards will emerge.


The role of the IIRC is to:


  • raise awareness of this issue and develop a consensus among governments, listing authorities, business, investors, accounting bodies and standard setters for the best way to address it


  • develop an overarching integrated reporting framework setting out the scope of integrated reporting and its key components


  • identify priority areas where additional work is needed and provide a plan for development


  • consider whether standards in this area should be voluntary or mandatory and facilitate collaboration between standard-setters and convergence in the standards needed to underpin integrated reporting; and


  • promote the adoption of integrated reporting by relevant regulators and report preparers.


Who are the members?


The IIRC brings together a powerful cross section of representatives from the corporate, accounting, securities, regulatory, and standard-setting sectors. Membership will comprise international representation from the following stakeholder groups: companies, investors, regulators, standard-setters, inter-governmental organisations, non-governmental organisations, the accounting profession, civil society and academia.


Further information on the IIRC can be found at


The International Integrated Reporting Framework


The International Integrated Reporting (IR) Framework is an examinable document for P2.


Objective of the Framework


The IR Framework establishes ‘guiding principles’ and ‘content elements’ that govern the overall content of an integrated report. This will help organisations to report their value creation in ways that are understandable and useful to the users.


The IR Framework is aimed at the private sector, although could be adapted for use by charities and the public sector.


The key users of an integrated report are deemed to be the providers of financial capital. However, the report will also benefit employees, suppliers, customers, local communities and policy makers.


The Framework is principles based and therefore does not prescribe specific KPIs that must be disclosed. Senior management need to use judgement to identify which issues are material. These decisions should be justified to the users of the report.


Those charged with governance are not required to acknowledge their responsibility for the integrated report. It was felt that such disclosures might increase legal liability in some jurisdictions and therefore deter some companies from applying the IR Framework.


Fundamental concepts in the IR framework


An integrated report concerns how value is created over the short-, medium- and long-term. To this extent, a number of fundamental concepts underpin the IR framework. These are:


  • The capitals


  • The organisation’s business model


  • The creation of value over time.


The capitals are stocks of value that are inputs to an organisation’s business model. The capitals identified by the IR are financial, manufactured, intellectual, human, social and relationship, and natural.


  • The capitals will increase, decrease or be transformed through an organisation’s business activities.


– The use of natural resources will decrease natural capital, making a profit will increase financial capital.


– Employment could increase human capital through training, or reduce human capital through unsafe or exploitative working practices.


Central to integrated reporting is the overall impact that a business has on the full range of capitals through its business model.


The business model is a business’ chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long term.


  • An integrated report must identify key inputs, such as employees, or natural resources. It is important to explain how secure the availability, quality and affordability of components of natural capital are.


  • At the centre of the business model is the conversion of inputs into outputs through business activities, such as planning, design, manufacturing and the provision of services.


  • An integrated report must identify an organisation’s key outputs, such as products and services. There may be other outputs, such as chemical by-products or waste. These need to be discussed within the business model disclosure if they are deemed to be material.


  • Outcomes are defined as the consequences (positive and negative) for the capitals as a result of an organisation’s business activities and outputs. Outcomes can be internal (such as profits or employee morale) or external (impacts on the local environment).


Value is created over time and for a range of stakeholders. IR is based on the belief that the increasing financial capital (e.g. profit) at the expense of human capital (e.g. staff exploitation) is unlikely to maximize value in the longer term. IR thus helps users to establish whether short-term value creation can be sustained into the medium- and long-term.


The content of an integrated report


An integrated report should include all of the following content elements:


  • Organisational overview and external environment – ‘What does the organisation do and what are the circumstances under which it operates?’


  • Governance – ‘How does the organisation’s governance structure support its ability to create value in the short, medium and long term?’


  • Opportunities and risks – ‘What are the specific opportunities and risks that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?’


  • Strategy and resource allocation – ‘Where does the organisation want to go and how does it intend to get there?’


  • Business model – ‘What is the organisation’s business model and to what extent is it resilient?’


  • Performance – ‘To what extent has the organisation achieved its strategic objectives and what are its outcomes in terms of effects on the capitals?’


  • Future outlook – ‘What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?’


  • Basis of presentation – ‘How does the organisation determine what matters to include in the integrated report and how are such matters quantified or evaluated?’


Including this content will help companies shift the focus of their reporting from historical financial performance to longer-term value creation.


Illustration – Integrated reports


  • is a UK-based public limited company that purchases shoes directly from manufacturers and then sells them through its own UK-based shops. AA has been profitable for many years and has continued to expand, financing this through bank loans.


AA’s shoes sell particularly well amongst lower income families and AA has therefore specifically targeted this demographic. AA offers a discount of 50% on school shoes if the child is entitled to free school meals. This discount is partly subsidised by a government grant.


  • maximises its profits by buying its inventory from overseas. In the past year there have been several press reports about poor working conditions and pay in factories where AA products are manufactured. AA is conscious that it needs to monitor its supplier’s employment conditions more closely.


  • has also been criticised in the press for the quality of its products. Some customers have complained that the shoes are not well-made and that they must be regularly replaced. A major consumer magazine has strongly argued that AA products are a ‘false economy’ and that customers would save money in the long-term if they bought slightly more expensive but better quality shoes


Staff who work in AA’s shops are paid the national minimum wage.


Training is minimal and staff turnover is extremely high.


  • does not fully engage with local or national recycling initiatives. The directors of the company believe these initiatives would increase operating costs, thus reducing the affordability of its products for its target demographic.


The success of the AA business model has led to an increased number of competitors. Although these competitors do not yet have the same high street presence as AA, some of them have invested more money into developing online stores. Although AA has a website, its products cannot be purchased online.




Why would an Integrated Report provide useful information about AA?




An integrated report might highlight a number of positive issues about




  • AA’s financial capital has increased as a result of its profitable current business activities.


  • Financial capital has increased due to the receipt of government grants and this will help AA to repay its debts in the short and also, potentially, the medium term.


  • AA’s has a positive impact on social capital by helping low income families to buy essential items of clothing. This is likely to foster brand loyalty from these customers, as well as generating good publicity. This may lead to a further increase in financial capital in the future.


However, it could be argued that the AA business model will not create value in the long-term. An integrated report might refer to the following issues:


  • The government grants may not continue indefinitely. This could be due to government budget cuts, increasing competition or, perhaps, as a result of ongoing quality issues with AA products.


  • AA does not invest highly in human capital. Unskilled and untrained staff are unlikely to foster brand loyalty and could lead to a loss of custom over time.


  • AA uses cheap labour from overseas. Although this is likely to increase financial capital, it may lead to a net decrease in other capitals


– AA may be criticised for not investing in local communities, or for exploiting overseas workers. By not investing in human capital there may also be a negative impact on social and relationship capital.


– AA’s recognition of the need to increasingly monitor its suppliers indicates that current economic benefits may not be sustainable in the longer-term.


  • Purchasing goods from overseas will increase AA’s carbon footprint. Moreover, AA does not widely recycle. Its activities thus place an overall drain on natural capital and this may deter some investors and consumers.


  • A focus on high street expansion may leave AA vulnerable to online competitors, who will be able to offer the same products more cheaply. AA’s lack of investment in staff may compound this because the retail stores are unlikely to offer a greater experience or level of service than can be obtained online. The current business model may therefore not be resilient in the medium or long term.




AA’s business model is currently profitable. Such information could be obtained from the historical financial statements. However, an integrated report that looks at value creation and stability in the medium and longer term may offer a more pessimistic outlook. Banks are more likely to invest in companies who have sustainable business models and therefore integrated reports will help them to make stronger investment decisions. Other investors, such as potential or current shareholders, would also be able to make more informed decisions.


Producing an Integrated report is not mandatory. Businesses which have a detrimental net impact on capitals (particularly non-financial capitals) are unlikely to voluntarily produce an integrated report. In contrast, companies who create value in sustainable ways are more likely to want to disclose this to users. However, if the production of an integrated report was mandatory, then it might motivate a company like AA to shift its focus from increasing short term financial capital to the generation of an array of capitals over the medium and long-term.


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